Throughout the last year, decentralized finance has been the most popular topic of debate in the crypto world, pushing the entire industry to new heights, developing innovative applications for the technology, and making financial services more accessible.
It plans to place economic infrastructure back in the hands of the people, and exactly like the way TCP/IP facilitated the growth of so many enterprises online, decentralized finance is bringing company onto the blockchain.
This past year, the introduction of automated market makers gave DeFi a much-needed increase. The total value locked into decentralized finance platforms sat at about $1.2 billion in June 2020 — a metric which had grown almost a hundredfold by May 2021.
Liquidity mining fuelled the sudden surge in DeFi utilization across the world last year, giving people access to extra tokens beyond the conventional interest benefits. The game-changer, however, was the way these platforms allowed users to farm their various tokens to partake in its own governance systems.
Although 2020 was a nice season for DeFi by the numbers, the true extent of the chaos that ensued past summer is known only to people who had been there to see it. However, the DeFi area has made significant progress since then, tackling all sorts of problems from technical constraints to better incentive versions.
Amid collapsing federal markets, a worldwide pandemic and BTC wrestling to push past the $10,000 mark, DeFi certainly made history last year — but will history repeat itself? Can the DeFi industry master up another parabolic surge one year after breaking into the mainstream not just for crypto users but to the global financial industry?
500 days of summer?
The largest competitor to the finance business is the exact financial ecosystem that’s in place now. Traditional, centralized finance has been around for centuries, with evolved over years of trial, error and alterations. While it’s a faulty system as far as BTC is concerned, it is not just better incorporated into modern society than any blockchain-based service now but it’s also the most popular way people put their money to get the job done.
DeFi allows for everything centralized finance offers and much more, however, there are many challenges it needs to conquer. For starters, most decentralized applications run on the Ethereum system, where network congestion has pushed gas fees to near-unaffordable levels. DeFi could possibly revolve to millions, or even billions, of users, however now, fewer than 350,000 wallets interact with Ethereum daily.
Decentralized finance may not be ready for mainstream adoption just yet, but it certainly has conventional financial services struggling to compete. However, some think DeFi is not competing with them at all. Sergej Kunz, co-founder of this 1inch Network DeFi platform, advised Cointelegraph:
„I’m pretty sure that DeFi shouldn’t be regarded as a rival for conventional financial services. I see banks and fintech companies getting convenient gateways to the new financial world of DeFi.“
Although the blockchain space mainly comprises developers, fans and retail investors, decentralized finance is slowly bringing much bigger players to the match. Institutional investors need a piece of this cryptocurrency pie, and DeFi is turning out to be a popular taste.
Most DeFi lending platforms advertise yield interest rates of between 8 percent and 70 percent, however with how quickly the ecosystem is growing, these astronomical rates might not be around for a lot longer. It’s likely that the more investors start making use of this product, the lower the rates of interest may fall.
Though at present, Ethereum hoards most of the attention DeFi brings, along with other projects are not waiting around because of its congestion issue to be solved. Blockchain interoperability is slowly becoming a reality, eradicating the siloed decentralized ecosystems of now, bringing more composability to the space, and enabling better allocation of development tools.
The Substrate-based Polkadot platform has empowered decentralized applications to interact with programs on other distributed networks and continues to entice projects with its more accessible development ecosystem.
Another significant hurdle for DeFi is regulatory clarity. Most active cryptocurrency markets are slapped with strict Know Your Customer and Anti-Money Laundering policies, and while this is a superb step forward on blockchain technology’s journey to mainstream adoption, regulatory uncertainty in DeFi could slow its progress in the brief term.
DeFi is not likely to become a fully controlled area overnight, and perhaps it will be since it may take attempt on an industrial scale to produce, update and maintain a robust regulatory framework for decentralized finance, but with a $70-billion marketplace at stake, there’s a lot of incentive to do so.
In 2020 alone, DeFi’s total value locked metric grew by an impressive 2,000%, and comparable growth this year could cancel DeFi as a $300-billion ecosystem by December. Today, the TVL figure is almost a third of the way there, and while it might be hard for your space to experience such exponential growth again this year, it is not completely hopeless. Since $300 billion is less than a sixth of their present total cryptocurrency market capitalization, it might be contended that DeFi is certainly more important to blockchain than that fraction.
Although TVL is not just a comparable metric to market capitalization, DeFi is on its way to getting a far more mature arena. With major players like Nexus Mutual and CDx making motions in the DeFi insurance area, tech giants Facebook and PayPal entering the realm of blockchain, and expert developers continually producing groundbreaking programs, expansion on a comparable scale to continue year is not completely out of the question.
DeFi has experienced unprecedented growth in the last couple of years, forcing a more engaging economy and hastening the modern electronic revolution. The challenges it must conquer are by no means undemanding. From basic interoperability features and capital inefficiency to reduced liquidity and unintuitive ports, DeFi has its work cut out for this in the years to come.
Blockchain technology is already incredibly complicated, and adding the technical complications of DeFi platforms to the mix might be the largest obstacle in its own way. It’s still hard to figure out how to utilize all of the products on offer, but in the minimum, there is just one way things can go from here — develop.
The typical investor is not likely to understand how MetaMask operates or how to utilize this, and before the business begins producing more convenient, intuitive approaches to interact with the ecosystem, mainstream adoption will remain out of reach. Although Ethereum 2.0 is expected to unite the chains later this calendar year, or in the beginning of 2022, to produce a more scalable version of the network with sharding, people are already finding ways around the issue.
Connected: DeFi bucks crypto market correction because Uniswap v3 leads the cost
Zhivko Todorov, DeFi ecosystem lead at LimeChain — a business that offers innovative spread ledger technology options for both enterprises and startups — told Cointelegraph,“High gas fees are a barrier to entry for retail users. But, we’re at a critical point where layer-two solutions are launching and picking up traction, which would drastically lower gas fees.“ However, congestion on Ethereum is not just increasing the network’s gas fees; it is alienating a significant chunk of traders.
„Blockchain’s throughput is hindering the influx of HFT [high frequency traders] traders to this industry,“ said Grigory Rybalchenko, co-founder and CEO of EmiSwap exchange, in a dialogue with Cointelegraph, adding,“High-frequency traders account for the large quantity on conventional centralized trades, and high fees are unlikely to induce them to migrate to DEXs anytime soon.““
The total market capitalization of electronic assets briefly crossed the $2-trillion mark this season. However, the crypto market remains tiny in comparison with the worldwide stock market, which now represents approximately $80 trillion globally. That being said, decentralized finance has achieved much in the area of just a few years, and as long as this pace of innovation continues, there might be another DeFi summertime as projects may start to capitalize all of the hard work done over the past year.